Divorce can be intricate, tricky, and emotionally overwhelming. When you have to relocate, find new housing and decide to rent or purchase a new home, you pile on additional tasks and frustration.
Many divorcing spouses understand the financial benefits of owning a home rather than renting. While obtaining mortgage financing on any given day may oftentimes involve a lot of paperwork and challenges, doing so during a divorce may seem overwhelming and out of reach for many.
For many reasons, divorcing clients may decide to purchase a new home with cash rather than obtaining mortgage financing. New home buyers who are in a position to pay cash for the new home need to make sure it is the right decision financially as it may cost you the ability to deduct the mortgage interest deduction on future mortgages on the new home.
The mortgage interest deduction is divided into two categories: Acquisition and Home Equity Indebtedness. Acquisition Indebtedness is any mortgage obtained to either purchase (acquire) or significantly improve the home. Home Equity Indebtedness is any mortgage obtained for any other reason than acquisition indebtedness.
When a new homeowner buys their home with cash, they need to ask themselves what their intent was for paying cash. Was it to avoid having any type of mortgage financing? Was it because they currently were unable to obtain mortgage financing because of an ongoing divorce or they didn’t qualify because they were unable to meet the requirements to use maintenance or child support as qualified income? Maybe their debt to income was too high because of their obligation to pay spousal support? Or maybe it was simply to have their purchase offer more attractive to the seller in a hot seller's market.
Whatever the reason, it may be in their best interest to speak to their financial adviser first in order to avoid losing any future mortgage interest deductions for tax purposes. If their intent is to take out a future mortgage to replenish their cash reserves used to purchase the home, they need to know there is a time limit to do so. Otherwise, they may risk losing any future mortgage interest deductions on the new loan.
Currently, IRS Tax Guidelines have a 90-day window for new homeowners to apply for a new mortgage on a home purchased with cash in order for this new mortgage to be classified as Acquisition Indebtedness. If a new mortgage is not applied for during this initial 90-day window, any new mortgage will be categorized as Home Equity Indebtedness which has a mortgage limit of $100,000 and is currently non-tax-deductible through the year 2025.
Involving a Certified Divorce Lending Professional (CDLP) early in the divorce settlement agreement can help divorcing homeowners set the stage for a successful refinance of the marital home.
Now more than ever, it is important to have a Certified Divorce Lending Professional (CDLP™) on your professional divorce team. A CDLP™ will not only understand these major changes within the mortgage industry but the impact they may play during the divorce process and obtaining mortgage financing.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.
It is always important to work with an experienced mortgage professional who specializes in working with divorcing clients. A Certified Divorce Lending Professional (CDLP) can help answer questions and provide excellent advice.
This information is shared in partnership with the Divorce Lending Association. Copyright 2019.
